Ladies and gentlemen, thank you for standing by and welcome to Uxin's Earnings Conference Call for the Quarter-Ended June 30 of 2020. [Operator Instructions] Today's conference call is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the call the call over to Nancy Song, Investor Relations Director of Uxin. Please go ahead.

Nancy Song - Investor Relations

Thank you, operator. Hello everyone, welcome to Uxin's earnings conference call for the quarter ended June 30, 2020. On the call today are D.K., our Founder and CEO; and Zhen Zeng, our CFO. D.K. will review business operations and the Company highlights followed by Zhen who will discuss financials and the guidance. They both will be available to answer your questions during the Q&A session that follows.

Before we start, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. These statements are made - are based on management's current knowledge and assumptions about future events that involve known or unknown risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements. Uxin does not undertake any obligations to update any forward-looking statements except as required under applicable law. For more information about the potential risks and uncertainties, please refer to our filings with the SEC.

With that I will now turn the call over to our CEO, D.K. Please go ahead.

Kun Dai - Chairman of the Board & Chief Executive Officer

Thank you, Nancy. Hello, everyone. Thank you for joining our earnings conference call today. In the most recent two quarters, the impact of coronavirus pandemic continued to create challenges for overall economic. Given the current macro environment, we are glad that we successfully completed the divestiture of our loan facilitation business and relieved ourself of the historical guarantee liabilities.With this business changes in place, the financial impact of the divesting the loan facilitation business, happening as financial guarantees and divesting the B2B business was there and will continue to be reflected in our financial statements for the quarter ended June and the September 30, 2020. Along with this business divestitures, we have shifted our business strategy from multi-businesses teams to our core focus and shifted our growth strategy from being finance - financing-driven to one that in used car quality and service oriented.

Under the previous financing-driven approach, we experienced a rapid transaction volume growth. We were also weighed down by a significant underlying credit risk and constrains on flow because we had to take all the guarantee liabilities and buyback the default loan when this delinquency assets meet a certain criteria.Now with this drive behind we entered into a new phase of development as a transaction-orientated online used-car dealer where our focus is finally on all in high quality value for money used cars and the premium purchasing services. We believe that continuously enhanced used car quality and purchasing services is the best way to maximize customer value and gain more customer trust and word-of-mouth referrals.Although it takes time to build a reputation and grow at a scale with this used car and service orientated approach, we believe that this is the key to maintaining our long-term competitive advantages and achieving sustainable growth. In order to create the best value and experience across the entire value chain for our customers, we upgraded our used car transaction processed and migrated every sales step online.

In transforming our business, we have upgraded the key points throughout our service process. We viewed a group of inventory collectors to curate the value for money used car from across the country to ensure that the highest tenders of car quality are meet by careful inspection, simplifying our pricing structure to facilitate the customers' purchasing decisions, offer professional consulting fees and purchasing services in a timely fashion from our online sales consultants, working with more financing partners to offer diversified used car finance product and improve overall loan approach - approval rate for our customer, provider will run program and after-sales services and make the entire purchasing process more convenient and efficient for our customers. All of these efforts have translated into better customer satisfaction and greater trust in our Uxin brand evidenced there by our increased net promoter score among our customers.

To further enhance the customer experience, we have reinforced our role as China's leading online used car dealer and beginning to build our own inventory of new car this months. This will help us to better control our risk of high - for used car and deliver higher transaction certainty to our customers. As we move up the supply chain and assess used car at a more favorable acquisition price, we will have greater facility in offering more competitive pricing to our customers, further building Uxin as a trusted and go-to-online decision for buying used car.In contrast to the local offline dealers traditional way of acquiring inventory based only on individual experience and user case, our inventory advantage energy comes from our strong data and analytics capability. We will take a more scientific and a systematic approach to procure used car by analyzing the extensive used car user behavior, used car and transactional data aggregated on our platform over the years. We will selectively build our inventory based on our proprietary assessment of customer preference, a car's value-for-money performance as well as real-time market dynamics and trends. In addition, we will offer refurbished - refurbishments as a new service by reconditioning our car to a like new condition before handling it over to our customers. This will be another key step in ensuring the best overall purchasing experiences as reconditioning can further enhance our cars value-for-money performance.

We believe that our data-driven and quality focus inventory strategy will further enhance customer satisfaction were enabling our to achieve fast - a faster inventory turn over. This will be another significant milestone for us in solidifying our position as China's leading national wide online dealer and offering high quality value-for-money used car and the premium services.

With that, I would like to turn the call over to our CFO, to walk you through the financial results. Zhen please.

Zhen Zeng - Chief Financial Officer

Okay, thanks DK. Hello, everyone. Thanks for joining us today. As DK mentioned in completing the online transformation of our transaction process we have also restructured our costs and expenses to adapt to new business and the service model. We now have a streamlined inventory sourcing and a car inspection, online sales consultants team and a back-office support team. In addition, higher customer satisfaction and a more word-of-mouth referrals also translates into more organic traffic and lower the need for external traffic acquisition. All these factors will enhance our long-term operational efficiency as we achieve greater scale over time.

Thanks to the tax cut that was implemented in China since May this year. Used car dealers now only need to pay 0.5% of the used car sales. This means we now have a more accommodative fiscal environment, new ways to operate as a actual dealer. We will work with our financial institutions in the form of inventory financing to proactively building our own inventory so that it will allow us to adequately our cash flow. Accessing used cars have more attractive acquisition cost by moving up the supply chain will not only reinforce our control over inventory, but also have us to potentially drive margin expansion over the long run. We believe this revamped inventory strategy will better position us to generate long-term value for our shareholders while maximizing customer value and experience.

Now let me walk you through our financial details for the quarter ending in June. Please note that the results I will discuss relative to continuing operations only. All numbers are in RMB unless otherwise stated. Also, please note that some numbers I refer to are non-GAAP numbers.You can find a reconciliation of these numbers at the bottom of our earnings release.

In the three months ended June 30, 2020, total revenue were RMB62 million compared with RMB389 million in the same period last year. The decrease was primarily due to the decrease in the 2C transaction volume and GMV as a result of economic downturn caused by the COVID-19 pandemic as well as the lead time that we need to fully ramp up its upgraded transaction process.

Our total 2C revenue was RMB52 million compared with RMB341 million in the same period last year. Online used car transaction volume is 3,887 unit for the three months ended June 30, 2020 and its corresponding GMV with RMB426 million.

Looking at two revenue stream of our 2C business. Commission revenue was RMB29 million compared with the RMB179 million in the same period last year, primarily due to the decreases in the transaction volume and GMV. Our commission rates expanded slightly to 6.7% from 6.2% in the same period last year as a result of our continuous effort to offer a nationwide selection of best value-for-money used cars as well as quality transaction services to the customer. Value-added service revenue was RMB23 million compared with RMB162 million in the same period last year, primarily due to the decreases in the transaction volume and GMV. VAS take rate decreased slightly to 5.4% from 5.7% in the same period last year as a result of pricing adjustment during the COVID-19 period.

Looking at other business. Other revenue was RMB11 million for the three months ended June 30, 2020 compared with RMB48 million in the same period last year. The decrease was mainly due to the divestiture of the Company's salvage car related business in January 2020.Cost of revenues decreased by 53% year-over-year to RMB80 million. The decrease was primarily due to the decrease in salaries and benefits for employees engaging in car inspection, quality control, customer service and after-sales servicesas well as the decrease in fulfillment cost due to a decrease in the transaction volume.

Gross margin was negative 28.4% for the three months ended June 30, 2020 compared with the gross margin of 55.9% in the same period last year. Total operating expenses was RMB151 million. Non-GAAP operating expenses, which excluded the impact of share-based compensation, was RMB156 million. Sales and marketing expenses decreased by 61% year-over-year to RMB116 million. The decrease was mainly due to a decrease in the salaries and benefits expenses as a result of the adoption of the flexible workload-based staffing program and some combination of the employee contracts resulting from our business model upgrade as well as the decrease in the traffic acquisition cost.

Sales and marketing expenses, excluding the impact of our share-based compensation, were RMB111 million. G&A expenses decreased by 29% to RMB87 million, the decrease was mainly due to a decrease in the salaries and benefits as a result of adoption of a flexible workload-based staffing program and some combination of employee contracts results from our business model upgrade as well as the decrease in the share-based compensation expenses and partially offset by the surveillance cost as a result of some termination of employee contracts and a goodwill impairment of RMB9.5 million recorded in the reported quarter.

G&A expenses, excluding the impact of the share-based compensation, was RMB98 million. RMB expenses decreased by 29% to RMB23 million, the decrease was primarily due to a decrease in the salaries and benefits expenses as a result of the adoption of the flexible workload-based staffing program and some combination of employee contracts resulting from our business model upgrade. R&D expenses, excluding the impact of our share-based compensation, was RMB24 million. Gain from the guarantee liabilities was nil for the three months ended June 30, 2020. We incurred the guarantee liabilities associated with the remaining guarantee obligations from its historical facilitated loans that were transferred to Golden Pacer.

We adopted Accounting Standards Update of 2016-13 Financial Instrument, Credit Losses, measurements of the credit loss on financial instruments on January 1, 2020 under a modified retrospective method before the adoption of ASC 326, gain or loss related to guarantee liabilities accounted for the under the greater of the amount determined on ASC 460 and the amount determined under ASC 450 was recorded as the gain or loss from guarantee liabilities. After the adoption of ASC 326, expected credit losses from a contingent guarantee liability shall be accounted for, in addition to and separately from the stand ready guarantee liabilities accounted for under ASC 460 and the provision for the contingent guarantee liabilities is currently recorded within provision for credit losses and the relief from the stand ready guarantee liabilities accounted for under ASC 460 is currently recorded within other operating income.

Provision of credit losses, net was RMB74 million for the three months ended June 30, 2020. The reversal of the provision for credit losses were primarily due to the release of guarantee liabilities of RMB86 million as a result of a supplemental agreement reached between us and one of our major financing partners in April 2020 with regards to our historically-facilitated loans. Pursuant to this supplemental agreement, this financing partner agreed to set a cap on the amount of cash we would need to fulfill its guarantee liability with this financing partner from 2020 to 2022. Loss from continuing operations was RMB128 million compared with RMB223 million in the same period last year.

Non-GAAP adjusted loss from continuing operations, which exclude the impact of share-based compensation, was RMB133 million compared with RMB196 million in the same period last year. Net loss from continuing operations were RMB152 million compared with RMB241 million in the same period last year. Non-GAAP adjusted net loss from continuing operations, which excludes the impact of the share-based compensation were RMB157 million in the quarter compared with RMB214 million in the same period last year. Turning to our cash position, as of June 30, 2020, we have cash and cash equivalents of RMB241 million. That sums our results for the three months ended June 30, 2020.

Moving on to our guidance, starting this month, September 2020, we will build our own used car inventory. We have started to select value-for-money used cars in the market, procure these cars and arrange for the reconditioning and refurbishment to operate them to a like-new condition before selling them to our customers. We are currently assessing relevant revenue recognition in accordance with ASC 606 for selling its own inventory. For the three months ended September 30, 2020, taking into account the continuous impact of the COVID-19 pandemic, upgrade progress of our business model and the completed business divestitures, excluding the revenues to be recognized under selling our own inventory starting from September 2020. We expect our total revenues from continuing operations to be in the range of RMB33 million to RMB35 million, which include commission revenue, value-added service revenue and other revenue.

If taking into consideration part of the revenues to be recognized under selling our own inventory, for which a portion of the revenues generated in September 2020 maybe recognized on a gross basis, we expect our total revenues from continuing operations for the three months ended September 30, 2020 to rise to a range of RMB65 million to RMB70 million. This forecast reflects our current and preliminary view on the market and operational conditions and is based upon the current situation and uncertainties associated with the COVID-19 pandemic, which are subject to change. This forecast is also based on our preliminary accounting assessment of such inventory-owning business model, which maybe subject to refinement and revision. That concludes our prepared remarks.

Nancy Song - Investor Relations

Thank you, Mr. Zhen. Operator, we would like to open the call for questions now.

Question & Answers

Questions and Answers:

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Operator

Thank you. [Operator Instructions] We have our first question from the line of Eddy Wang of Morgan Stanley. Please go ahead.

Unidentified Participant - - Analyst

Hi. This is Michael, Nancy. Thank you for taking my question. [Foreign Speech]

Let me translate myself. So my question is about, the long-term outlook of the used car industry in China, especially for the next few years. So - and under that background, I think what's the advantage of the inventory taking business model we will adopt, yes, just want to hear your thoughts on that? Thank you.

Kun Dai - Chairman of the Board & Chief Executive Officer

[Foreign Speech] In the past one or two years upgrading product quality and services is a keynote in every consumer-facing industry and sector and high-quality production and satisfaction services are the foundation of selling more customers and building reputation. Under this environment, where individuals are highly connected with each other and the information exchange is highly effective building reputation and gaining word of mouth referrals is key to our Company's long-term sustainable growth and this is also very true in the used car industry, after over a decade of development, we are their last industry senders and honestly, the industry - the used car industry unfortunately had a less than satisfactory reputation. We believe being honest and sincere when servicing customers offering them high-quality used cars and premium services is the best way to transform the entire industry and achieve a healthy and long-term growth for the overall sector.

Yeah. So in the past one or two years, more and more consumers are turning away from new cars and chose to buy used cars. This is not simply because they cannot afford buying a new car, but more about they have now have a more regular consumption philosophy. They want to spend less on a used car, but get a like-new condition, which is almost as good as a new car. With this trend more and more used car dealers will come up willing to offer high-quality used cars and premium services. And in turn with this benefit, more and more consumers will also chose to buy used cars as well and affected by the soft macro economy, overall, used car industry will see a very slow growth rate here, but looking at next one year or two, we are expecting it will gradually recover to a double-digit growth. We decided to build our own inventory of used cars now is actually encouraged and driven by our quality focus and a customer referral strategy. We believe offering high-quality value for money in used cars and premium purchasing services will witness higher customer satisfaction and reputation as well, more customer trust and word-of-mouth referrals will not only increase our car sales, but also improve our ability to drive long-term market expansion as a result of the quality premium our customers are willing to pay us.

We started to build our inventory now, because we think we have three, four advantages. The first one is about the digitalization and intelligent data analytics both our historical transactions and the current transactions actually exist in all in digital form, so do our customer behaviors and their preferences aggregated on our capital. So, this enables us to well manage the supply and demand as well as the selling prices with totally different decision-making capabilities from the traditional used car dealers. And our current digital capabilities allow us accurately predict the monthly sales of certain car makes and model even to predict the turnover of the specific model and this perfectly guides us to selecting cars and build our own inventory.

And the second is about our capability to realize purely online used car transaction and services currently in China's used car market, we are actually the only one who is able to sell cars completely from online. Our customers can easily make the purchase decision after reading our used car digital profile online. In addition, our customers are able to make these decisions without the need to be assisted by offline sales staff throughout the entire process and also our fulfillment capability covers over 300 cities and counties combined across China. Our customers can receive their cars that meet or even beyond their expectations within days after they make the purchase online. Our pure online way of selling used cars significantly strengthen our ability of matching cars with consumers on a nationwide level, which also ensures higher chance of faster turnover.

The third one is about our advantages in the cost structure. And our cost structure is actually fundamentally different from that of traditional offline dealers. So unlike them, we don't need to have the extensive offline physical showrooms and we don't need a large offline sales team either. Such advantages actually enable us to grow into a national online used car dealer with strong operational efficiency and the potential to grow at scale.

So, looking at the macro environment now it's actually a good timing for us to take this approach given the current used car taxation creates a more variable environment for us to build the inventory. And since May of this year, the used car tax cut in China allows dealer only need to pay 0.5% of used car sales as tax compared with 2% previously and with tax rate, our overall tax expenses will increase much as compared with before. And in addition, for the cars that may procure upfront, the car cycles are actually with us. So, we are able to work with financial institutions on inventory financing. So, when everything ramps up, the macro environment actually also supports our decisions. Thank you, Eddy.

Unidentified Participant - - Analyst

Thank you.

Operator

Thank you. I would now like to hand the conference back to Ms. Nancy Song for closing remarks. Please go ahead.

Nancy Song - Investor Relations

Thank you again for joining our call today and for your continued support in Uxin. We are looking forward to speaking with you again in the future. Thank you.

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